Economics • Economic BasicsHard
Which of the following best defines the 'Friedman-Savage Hypothesis' regarding consumer choice under uncertainty?
A. Individuals exhibit risk-averse behavior for low-income levels and risk-seeking behavior for high-income levels.✓ Correct Answer
B. Consumer utility is solely a function of permanent income rather than transitory income.
C. Money demand is independent of interest rates in the long run.
D. Inflation expectations adjust adaptively rather than rationally.
💡 Solution & Explanation
The Friedman-Savage hypothesis explains consumer choices under uncertainty by proposing that individuals have utility functions with varying curvatures, exhibiting risk aversion at lower income levels and risk seeking at higher income brackets. This framework helps account for why people simultaneously purchase insurance policies and participate in lotteries. Advanced consumer behavior theories are useful for specialized economics optional and competitive papers.
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